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C H A P T ER 1
T H E L O NG S HA D O W O F I N F O R MA L I T Y
and examined informality in terms of either output or employment.2 The book examines three dimensions of informality—output, employment, and perceived level of informality—and uses a combination of informality measures to overcome the limitation of each measure (chapter 2). In addition, various empirical strategies are employed to address the specific questions posed in different chapters. The study is the first to conduct a Bayesian model averaging (BMA) estimation—designed to capture model uncertainty—to identify robust correlates of informality, and a meta-analysis of published empirical studies to estimate the wage gap between formal and informal workers (chapter 4). For the purposes of this study, informality is defined as market-based legal production of goods and services that is hidden from public authorities for monetary, regulatory, or institutional reasons (Schneider, Buehn, and Montenegro 2010).3 Output informality is proxied by estimates based on a dynamic general equilibrium model, in percent of GDP, and employment informality is proxied by self-employment in percent of total employment, unless otherwise specified (chapter 2).
Key findings and policy messages Using a comprehensive database of multiple informality measures, this book examines the main characteristics of the informal economy, discusses its developmental implications, and presents a range of policy options to address issues associated with it.
Features of informal activity Informality is associated with underdevelopment more broadly (La Porta and Shleifer 2014). Whereas the informal economy accounts for one-fifth of GDP and 16 percent of employment in advanced economies, it accounts for, on average, one-third of GDP and 70 percent of employment in EMDEs (of which self-employment accounts for more than a half; see chapter 2). Both informal output and employment have declined since 1990, especially in EMDEs. Thus, on average in EMDEs, the share of informal output in GDP fell by about 7 percentage points (to 32 percent), and the share of selfemployment in total employment declined by about 10 percentage points (to 36 percent) over 1990-2018. These declines were broad-based. There is wide heterogeneity in informal activity among EMDEs and EMDE regions. For example, in 2018, in terms of output, the informal economy ranged from around 10 percent of GDP to 68 percent of GDP; in terms of employment, self-employment
2 Studies like Fajnzylber, Maloney, and Montes-Rojas (2011) and Amin (2021) relied on survey-based estimates, whereas studies like Dreher and Schneider (2010) and Elgin, Elveren, and Bourgeois (2020) utilized model-based estimates. Bajada (2003), Dell’Anno (2008), and Giles (1997) examined output informality, whereas studies like Fiess, Fugazza, and Maloney (2010) and Loayza and Rigolini (2011) examined employment informality. 3 The definition and classification of informality are context-specific. See chapter 2 for various other definitions.
